by Mark Johnston
Two years ago, at the start of 2009, a ripple started in Chicago that resonated across America. The result was that a new housing programme was created aimed at helping the faltering economy of the USA and the beleaguered housing market.
Rick Santelli, a reporter from the windy city latched a tirade and attempted to maul the Obama Administrations endeavours to subsidise home owners who couldn’t afford their mortgages but took them out regardless.
The efforts of Rick centred around why ordinary and responsible American citizens should be providing support for enhancements to properties where mortgage repayments and other bills aren’t being maintained or paid. What would effectively be a bank roll for a group of financially irresponsible individuals with poor financial planning foresight? A rant that acutely captured the feelings of most citizens.
Two years later, the Obama administration is in open talks that will go a lot further and may even end up writing down the principal (the outstanding debt owed) on thousands of mortgages.
The writedown of principal has generally been seen as a positive and progressive step by many consumer groups. Rightly so but in need of finer details to be put to press and for the average Joe not to foot the entire bill. They feel that this may be the most efficient way to help the majority of the homeowners who are in trouble. Recent protests have demonstrated populist feeling and Washington is looking to push forward with principal write downs.
Feelings on the hill are that write downs, in this manner, will provide the best bang for your buck and a one off reduction, of between 90 – 97% of loan to value (LTV) would motivate the mortgage market and significantly improve consumer confidence. But is this just another ill conceived and badly though out plan or is there genuine value here. The, under 30 page proposal, doesn’t outline penalties or fines but does detail an almost code of conduct for how they should treat borrowers through the loan modification
The political repercussions, of publicly funding failing households, through unfortunate circumstances or reckless mortgage decisions but who now requiring bail outs, may be fierce. Political heat and unpopular feeling are not new to the Obama administration and may very well result in his and his parties failure at the next election.
What about the banks. The general feeling is that they will accept whatever regulation are put in, the main culprits want to put in place whatever will draw a line under this whole issue. The attorneys general recently sent out a proposal to the banks outlining loan changes for delinquent borrows to lower mortgage payments and went further towards writing down the principal. These proposals make foreclosures more difficult and give the borrower more flexibility in repayments. While the banks will inevitably feel this pain, the market needs confidence that the right decisions are being made and everyone is in it together.
The banks will, however, have an opportunity to formally respond, none will comment openly at this time and many may just take their medicine to resolve this matter.
Whatever the critics say, the Obama administration is at least engaging lenders and homeowners at the right level and time will tell whether this latest plan works.
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